Employment and Training Administration
Washington, D. C. 20210






March 22, 1991




March 31, 1993











for Regional Management




Allocation of Costs of Assessing Collecting State Taxes


  1. Purpose. To provide guidance to the State Employment Security Agencies (SESAs) in determining costs of assessing and collecting state taxes which are not used solely for unemployment insurance purposes.

  2. Background. In recent years, many states have enacted legislation that requires the SESA to collect various special taxes. Some taxes are used solely for either unemployment insurance (UI) purposes or for employment service (ES) purposes. Some taxes are used for both or and ES purposes. Other taxes collected are for temporary disability, State income, health insurance or training which are not used for either UI or ES purposes. In some cases, the taxes are used for mixed purposes, and only partially for U1 or ES, or both.

    With the increasing number of taxes the SESAs must collect, there has been an increasing number of questions concerning whether the. costs of assessing and collecting such taxes may be charged to grants for the administration of the UI or ES programs.

  3. Cost Principle. Pursuant to 29 CFR 97.22(b), the principles for determining allowable costs under grant programs administered by the states are set forth in OMB Circular No. A-87, "Cost Principles for State and Local Governments" (46 FR9548, January 28, 1981). Section C.2. of Attachment A to OMB Circular No. A-87 provides that "[a] cost is allocable to a particular cost objective to the extent of benefits received by such objective" and, further, "[w]here an allocation of joint cost will ultimately result in charges to a grant program, an allocation plan will be required as prescribed in Section J [of the Circular]."

    Paragraph J.1. of Attachment A of OMB Circular No. A-87 provides that "[a] plan for allocation of costs will be required to support the distribution of any joint costs related to the grant program." A cost allocation plan is defined as the documentation identifying, accumulating, and distributing allowable costs under grants and contracts together with the allocation methods used." (OMB Circular No. A-87, Attachment A, Section B.2.) Requirements of the cost allocation plan are listed in OMB Circular No. A-87, in Attachment A, Section J.2. Therefore, when a SESA administers a tax which is only partly related to, or the proceeds of which are only partly used for the UI program, the SESA must address the allocation of these costs in a cost allocation plan.

  4. Limitation on Use of UI and ES Funds. Section 302(a) of the Social Security Act (SSA) provides that the Secretary of Labor shall certify to the Secretary of Treasury, for payment to each State which has an unemployment compensation law approved by the Secretary under the Federal Unemployment Tax Act (FUTA), such amounts as the Secretary determines to be necessary for the proper and efficient administration of such State law. These payments are sometimes referred to as Title III grants.

    Section 5(b) of the Wagner-Peyser Act provides that the Secretary of Labor shall certify to the Secretary of the Treasury, for payment to each State meeting certain conditions, such amounts as the Secretary determines to be necessary for allotment (consistent with the limitations in the Wagner-Peyser Act) in accordance with the formula set out in Section 6 of that Act. These payments are commonly called Wagner-Peyser or ES grants.

    These provisions of the Federal laws establish UI and ES as two separate grant programs. Therefore, in accordance with OMB Circular No. A-87, Title III grants may be used solely for administration of the approved State UI law and Wagner-Peyser grants may be used solely for administration of the ES program under an approved State plan.

    Under the authority granted by Section 302(a), SSA, Title III grants may be used, to the extent described below, to pay for costs of administration for assessing and collecting UI taxes. State tax administration has always been an integral part of the administration of the State's UI law, and the necessary and reasonable costs of the tax administration activities have always been allowable charges to Title III grants. As concerns the use of Title III funds, three possible funding situations exist:

    1. When all revenues from a tax are deposited in the unemployment fund to be used for the payment of compensation, are used to pay interest on Title XII loans, or are used for the administration of the UI program, Title III grants may be used to fund the entire cost of tax administration.

    2. When the SESA collects a tax which is used entirely for "non-UI" purposes, Title III funds may not be used (on a reimbursable or any other basis) for costs of administering the tax. Non-UI purposes include ES administration (including providing employment services to UI claimants), job training, economic development, temporary disability payments, health related benefits, State income tax, or any other non-UI purpose.

    3. If a portion of the revenues of a tax are used for UI purposes and a portion for non-UI purposes, then a portion of the cost of administration may be charged to Title III grants in relation to benefit received. This applies to all taxes for "mixed" (i.e., part UI, part non-UI) purposes.

    Section 302(a), SSA, is the only statute administered by ETA which authorizes the use of granted funds to pay for costs of tax administration. Funds granted for administering the ES program are restricted to the specific purposes set forth in the Wagner-Peyser Act. Collection of revenues, even to enhance ES activities, is not one of these purposes. Similarly, the Job Training Partnership Act restricts the use of granted funds to those purposes specified in that law and the collection of revenues is not one of these purposes.

    Aside from the above limitations on the use of granted funds, States are free to determine how to finance the costs of collecting these non-UI or mixed-use taxes. States may, for example, take the costs of collection from the revenues generated by the non-UI or mixed-use tax or from State general revenues.

  5. Application. Until now, the Department of Labor (DOL) has not routinely required SESAs to submit proposals for allocation of non-UI or mixed-use tax costs for Departmental review or approval. Henceforth, such proposals are required and costs incurred in conjunction with the assessment, processing or collection of a tax, any part of which is used for non-UI purposes, will be considered an allowable charge against UI grants only if the methodology for allocating such costs is included in the SESA's Indirect Cost Proposal submitted to and approved by the cognizant Federal agency. This requirement will be effective for all proposals submitted following issuance of this GAL.

    The section of the proposal addressing tax collection costs will vary depending on how the tax is collected. Although DOL has considered the desirability of developing a model proposal for States, this approach was discarded due to the significant differences between the State cost accounting systems and the procedures for collecting the various taxes. Any proposal for allocating tax collection costs must conform to the cost sharing principles of OMB Circular No. A-87 and must be based on a measure of the benefit received. The cost of tax collection must be distributed between the UI tax or taxes and the non-UI or mixed-use tax or taxes and must be based on the most accurate data available. Depending on the organizational structure and the services provided for each tax collection activity, acceptable proposals could be based on, for example, a current time analysis of tax unit cost centers. Other measures could also be used if they result in an equitable distribution of costs. DOL has also, for example, accepted a measure of the amount of space utilized in the tax data files.

    Many SESAs collect taxes which merely permit (but do not require) the revenues, or a part thereof, to be used for UI purposes. Because of this, there is no guarantee UI will receive any benefit from these taxes or that the related costs of collecting the taxes are chargeable in whole or in part to Title III grants. For any year in which such taxes are collected, the State will need to determine, to the extent possible, whether any of the revenues will be used for UI purposes. The cost allocation proposal for that year should be based on a reasonable estimate of the costs of collecting the taxes, which reflects the prior year's history to the extent appropriate. Any difference between estimated and actual costs of collecting taxes used for UI purposes must be taken into account in preparing subsequent proposals.

  6. Penalty Mail. Whenever a SESA collects a tax which is not solely restricted to UI purposes, penalty mail, as defined in 39 U.S.C. 3201(1), must not be used for any mailing related to the tax, whether or not the mailing also includes UI material. ES mailings using penalty mail are restricted to activities authorized under the Wagner-Peyser Act. As noted above, the collection of a tax is not an activity authorized under the Wagner Peyser Act; therefore, ES grants may not be charged for its collections. When a SESA collects taxes for other than UI purposes, the allocation of postage costs between the various programs must be addressed in the SESA's proposal. GAL 6-89, dated April 14, 1989, advises SESAs on the proper use of employment security penalty mail.

  7. Identification of Taxes for FUTA Credit Purposes. The proper identification of taxes for FUTA credit purposes is not a matter which needs to be addressed in the proposal. However, SESAs must assure that employers are aware that a tax payment may be used for purposes of obtaining a credit against the Federal unemployment tax only to the extent the payment represents contributions deposited in the State's unemployment fund which are to be used in the payment of unemployment compensation.

  8. Action Required. SESA administrators should review all taxes, assessments, and surcharges collected by the SESA. Any SESA collecting a tax which is not used solely for UI purposes must include a section in its next Indirect Cost Proposal which addresses allocation of costs associated with that tax. Costs in collecting taxes may be charged against Title III grants only under an approved plan.

  9. Inquiries. Please direct questions to the appropriate ETA Regional Office.